Construction Contracts: Fixed Price Vs. Cost-Plus

Fixed Price Contract

In a fixed price construction contract, the total cost of the project is agreed upon between the client (usually the owner or developer) and the contractor before the construction work begins. The contractor provides a detailed breakdown of the project’s scope, specifications, and associated costs. The agreed-upon price remains fixed throughout the project, regardless of any unforeseen circumstances or changes in material prices, labour costs, or project requirements. The contractor bears the risk of any cost overruns or delays, ensuring that the client’s expenses remain predictable and manageable.

Advantages of Fixed Price Contracts

– Certainty of costs: The client knows the exact amount they will pay for the project, facilitating budgeting and financial planning.

– Contractor’s accountability: The contractor is responsible for managing costs effectively and delivering the project within the agreed price.

– Reduced administrative burden: The client doesn’t need to closely monitor or approve every expense, as the contractor absorbs cost fluctuations.

Disadvantages of Fixed Price Contracts

– Limited flexibility for changes: 
Any modifications or changes to the project may result in additional costs or negotiations.

– Contractor’s risk: The contractor assumes the risk of unforeseen circumstances, potentially impacting their profitability.

Cost-Plus Contract

In a cost-plus construction contract, the client agrees to reimburse the contractor for the actual costs incurred during the construction process. This includes the direct costs of labour, materials, and subcontractors, as well as overhead expenses and a predetermined fee or percentage for the contractor’s profit. The client pays for the project based on the actual expenses incurred, plus the agreed-upon fee.

Advantages of Cost-Plus Contracts

– Flexibility for changes: The client can introduce modifications or changes to the project scope, design, or materials without significant renegotiation.

– Transparent cost breakdown: The client can see the actual expenses incurred, ensuring transparency and accountability.

– Shared risk: The contractor and client share the risk of cost overruns or unforeseen circumstances.

Disadvantages of Cost-Plus Contracts

– Uncertain final cost: The final cost of the project may not be known until the construction is completed, making budgeting and financial planning more challenging.

– Client’s oversight responsibility: The client must actively monitor and approve costs to prevent excessive spending or disputes.